Why Is the Price of S&P500 Going Up When the Market Is Not Recovering?!

For the investors out there, the S&P500 Index will be no stranger to you.

As of the time of writing, the S&P500 Index sits at US$2873.

This is actually the same price level as April till June last year. Despite the current outlook forecast not being the same as it was a year ago.

This got us thinking.

Disclaimer: Opinions expressed in the article should not be taken as investment advice. Please do your own due diligence.

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In Singapore, only essential services are in place.

Even your favourite bubble tea shops are not considered as essential services.

Globally, while some countries are slowly reopening, many are still shutting their doors.

You may have seen how Donald Trump wants to reopen the economy… or how the mayor of Las Vegas’ is open to the idea of offering her city as a “control group” to test whether social distancing is but just a placebo.

But let us leave the talks on politics for another day.

Instead, let’s discuss possible reasons why the market is still going upwards… Despite the lack of significantly positive news.

You may understand the market correction of the 30% losses from yearly highs seen at about US$3380, but you may not understand that 25% upward gains from the low of US$2300.

All this is happening, despite the economy not recovering, and the vaccine for COVID-19, not found at the moment.

Most economies are still under some form of lockdown, either full or partial.

Why then, did the S&P500 show an overall recovery from March lows till now?

As an avid observer of the S&P500, it is very perplexing. But here are some of my personal thoughts and opinions.

Reasons for S&P500’s Recovery from March 2020 Lows

FED is Offering Unlimited Quantitative Easing

Quantitative easing (QE) is a form of unconventional monetary policy in which a central bank purchases longer-term securities from the open market in order to increase the money supply and encourage lending and investment.  – Investopedia

On March 15, 2020, the U.S. Federal Reserve (aka FED) said it would do another round of Quantitative Easing. Unlimited Quantitative Easing, in fact.

This means that it will buy an unlimited amount of government debt, as well as corporate and municipal bonds.

In short, pumping in money to increase liquidity in the market in order to stimulate the economy. Notice that the trend upwards is seen the week after the FED’s announcement, albeit not immediately.

When quantitative easing happens, there tends to be inflation in the market. Prices of goods and services will increase, and financial assets are no exception.

Just take a look at their balance sheet.

Basically, what is going on seems to be a little like this:

“We are facing a crisis now. Can you lend us money?”

FED: “How much do you need?”

“How much do you have?”

FED: “Oh, I have an UNLIMITED amount of money. TAKE IT!” 

“Alright then. SHOW ME THE MONEY.” – just my tagline on Seedly.

But no really, if you know where the money is, do show me.

How is the unlimited QE (or unlimited supplying money to the economy) possible? Well…

Just checked – my printer cannot print money. Can yours?

Prices are Dependent on Market Sentiments

Who decides the prices of stocks? Is it you or me? Not really. It is the market. And the market is driven by sentiments. People like you and I have feelings. Emotions. It’s like how when you can’t get your bubble tea, you go onto Instagram to rant. Guilty as charged? It’s okay, you’re not alone.

Same thing as with the markets. If you, me, the rest of the world largely feel like the economy is going to improve and hey, we are not in as bad of a situation as what we had thought we would last month, we start to buy the stocks. Moreover, many people think that bad news are already priced into the market. This means that investors are already expecting the weak earnings results of companies, it is not a piece of surprising news.

If a large enough number of people start doing that, the stock prices will go up as demand increases. This is even though we haven’t actually seen substantial news showing significantly different market outlook.

Which brings me to my next point.

Fear of losing out

Have you ever wanted to buy a stock, and then see its price go up the next day and be like, “Damn I should have bought it yesterday!”

This is a psychological effect – the fear of missing out on potential profits.

We humans are not spared from our own emotions.

You can just think of it as when how, if you find $10 on the ground, the amount of happiness you feel would be less than the sadness from if you were to lose $10 by accident.

The Number 30%

The price of S&P500 faced a 30% decline from its previous high before it recovered to the prices we see today.

Remember in your marketing class, you learn how pricing a product at $9.90 looks a lot cheaper and more attractive than $10? Something like that.

Take a closer look at the S&P500 prices from March to now. It is not just a simple case of decreasing and increasing.

There are some ups and downs.

At the 10% decline, there are people starting to buy more shares. We can see the same when S&P500 declines by 20% and 30%. When the stock drops to what a buyer perceives as a low, they will start to put in money from their treasure chest into the market. The traders will call this level the price support level.

The support level just refers to a certain price level that the stock does not fall below for a period of time, because there would be enough buyers entering the market at this price and hence would push the prices up.

30% is a huge decline in the market prices.

But it is more than just a number – it is a psychological effect. We would feel like the stock market has fallen to a point where it is about time it bounces back up – which is why we buy.

When there is a high volume of buyers, the market price then increases.

So… “Have We Hit the Bottom Yet?”

And “have we missed the bottom?” – Must be the most popular questions now.

I have seen so many discussions about it lets just say that NOBODY REALLY KNOWS.

You can read tons of articles online and there will always be two opposing views.

Is This an A V, W or L Shape Recovery?

NOBODY KNOWS.

There is a constant mix consensus on the ground.

We are all price takers in the market. This means the market determines at what prices we can make a purchase or a sale!

Whether or not we missed the bottom is not the main point of this article!

Concluding Thoughts

The main takeaway is that sometimes, you can have all these logical explanations and plans to buy a stock or instrument at a certain price but later realise your plans cannot come into fruition.

“But the economy is not recovering! Shouldn’t prices decline? Market going up just does not make sense!”, you say.

But investors are not all rational people. The market is not driven by facts alone. It is driven by demand and supply, of which, investor’s sentiments are a factor too. And when demand exceeds supply, the stock prices will go up.

In conclusion, at this time, it is good to go through the checklist of things you need to have before you invest. If you still want to look at the S&P500 Index, you can check out this article here.

The money you use to invest should not be from the money needed to pay off your short-term or near-term liabilities. Remember, always set aside your rainy-day funds (6 months’ worth of monthly expenses) first!

Disclaimer: Opinions expressed in the article should not be taken as investment advice. Please do your own due diligence.